Economists Downplay Inflation Concerns Amid Iran Conflict

Economists from Capital Economics have suggested that concerns over the Iran conflict leading to sustained inflation and a global tightening cycle may be overstated. According to Jin10, they noted that while inflation in developed economies is expected to rise to 3% to 4%, the risk of persistent 'second-round effects' is lower than during 2022 to 2023. This is due to a softening labor market, reduced fiscal support, and already high interest rates. Many policymakers are inclined to overlook temporary inflation spikes driven by energy factors. They believe that stagflation would only occur in extreme scenarios, such as a prolonged blockade of the Strait of Hormuz and significant damage to critical infrastructure. The economists added that if such situations arise, high energy prices and commodity shortages might compel central banks to raise interest rates again until economic growth slows enough to prompt a policy shift by 2027.